XL Capital Ltd Announces Second Quarter 2009 Results

Reuters
Source: XL Capital Ltd.
July 28, 2009


-- Book value per ordinary share increased by 26% to $18.89 at June 30, 2009

HAMILTON, Bermuda, July 28 /PRNewswire-FirstCall/ -- XL Capital Ltd ("XL" or
the "Company") (NYSE: XL) today reported its second quarter 2009 results.

Commenting on the Company's performance, Chief Executive Officer, Michael S.
McGavick, said: "Finally!  We are pleased to report a quarter in which the
strength of the XL franchise shines through clearly, despite challenging
market conditions in the sector.

"It is also pleasing to be able to prove that investment portfolio accounting
marks can go up as well as down.  For the quarter, we are reporting a 26%
increase in XL's book value per ordinary share to $18.89 and a 31% increase in
tangible book value per ordinary share to $16.41.

"This was another turbulent quarter for foreign exchange markets with the US
Dollar reversing some of its strengthening of recent quarters and the overall
impact on XL, inclusive of the income statement impact, was a net increase in
Shareholders' Equity of $143.7 million after tax.  The income statement impact
of foreign exchange movements was an after tax loss of $132.6 million and this
was the principal contributor to the reduction of net income and operating
income from the prior year quarter.  Excluding this item, operating income
increased from the prior year quarter reflecting the strength of our core
business.

"Gross Premiums Written for our P&C operations is down 16% for the quarter
year on year, a significant improvement on the trend last quarter and
reflecting the month on month improvement that we noted during our first
quarter earnings call.  This reflects both increased selected new business
generation this quarter as well as continued improvements in retention and
pricing. Going forward, our recently announced agreement with National
Indemnity Company relating to our 'Side A' professional book should further
contribute to our new business production.

"Our P&C operations' combined ratio of 93.0% in the second quarter is an
improvement over the full year 2008 and only slightly higher than the same
quarter last year.  This strong result reflects the consistent strength of our
underwriting discipline and strong reserve position.

"During the second quarter we continued de-risking our investment portfolio. 
We have essentially completed the asset sales associated with our fourth
quarter restructuring charge and continue transitioning the portfolio to one
that is more typical of a P&C focused operation.  On a year-to-date basis we
have reduced our exposure to more volatile asset classes by $3.5 billion.  At
June 30, 2009, XL had $17.2 billion of its $32.0 billion fixed income
portfolio in cash, government, government related and agency or
agency-guaranteed securities.

"XL continues to attract new talent including significant additions to our
underwriting teams around the world.  We have done this while remaining on
track in terms of reducing our underlying operating expense base.  Our two
previously announced programs in this regard are both on target in terms of
cost, savings and timing.  We recorded costs of $9.1 million in the quarter in
connection with these programs.

"This quarter for XL marks a return to positive growth in shareholder value
while we continue to deliver solid operating performance.  We are on track
with everything we set out to do and the benefits are showing as expected.  XL
is back to competing from the front foot."

He concluded: "As our results indicate, XL is stable with strong capital, but
we are not yet satisfied. We now have the ability to make the franchise great
once again by remaining focused on delivering value to shareholders and
clients."


    2009 Second Quarter Summary Financial Results
    Three Months Ended June 30
    (US Dollars in thousands except per share amounts)

                                                 (Per Share-Diluted)
                        2009     2008  Change   2009    2008   Change
    Net income       $79,949 $237,851    -66%  $0.23   $1.33      -83%
    Operating income 162,648  266,205    -39%   0.47    1.49      -68%


The Company produced net income for the second quarter of $79.9 million or
$0.23 per ordinary share, compared to $237.9 million or $1.33 per ordinary
share for the second quarter of 2008.  Operating income was $162.6 million, or
$0.47 per ordinary share, compared to $266.2 million, or $1.49 per ordinary
share in the second quarter of 2008.

The decrease in net and operating income in the quarter was in part driven by
a foreign exchange loss of $145.2 million which results from the weakening of
the US dollar against other major currencies, primarily Sterling.  Also
impacting the reduction in net and operating income during the quarter was a
decline in net investment income of $112.0 million compared to the second
quarter of 2008.  Partially offsetting these impacts, the Company recorded a
profit of $41.5 million from the investment fund and investment management
affiliates compared to a loss of $18.7 million in the prior year quarter.

Net investment income for the quarter was $328.3 million compared to $440.4
million in the prior year quarter. Net investment income from P&C operations,
excluding investment income from structured products, decreased 26.7% from the
prior year quarter to $218.5 million.  This decrease was primarily due to
lower investment yields, driven by both the impact of lower US LIBOR rates on
floating rate structured credit assets, and higher allocations to lower
yielding US Treasuries, Agencies and cash as a result of continued de-risking
activities.

Pre-tax net realized investment losses for the quarter were $80.4 million
compared to a gain of $2.0 million in the second quarter of 2008. The loss for
the second quarter of 2009 included other than temporary impairments, net of
non-credit impairments, totaling $84.9 million, partially offset by realized
gains on securities sales of $4.5 million.  The realized gain in the second
quarter of 2008 included other than temporary impairments of $47.7 million. 
As a result of new accounting guidance that became effective this quarter, the
Company recorded $30.7 million of non-credit related Other than Temporary
Impairment ("OTTI") in shareholders' equity and recorded a transitional
adjustment on the implementation of this guidance of $229.7 million that
increased both unrealized losses on investments and retained earnings.

The annualized return on ordinary shareholders' equity, based on operating
income, was 11.2% for the quarter as compared to 13.3% in the prior year
quarter.

For the first half of 2009, the Company produced net income of $258.3 million
or $0.76 per ordinary share, compared to $449.7 million or $2.52 per ordinary
share, for the prior year period.  Operating income was $375.1 million or
$1.11 per ordinary share, compared to $543.1 million or $3.04 per ordinary
share in the prior year period.  The annualized return on ordinary
shareholders' equity, based on operating income, was 12.9% for the first half
of 2009 compared to 13.0% in the prior year period.


    P&C Operations
    Three Months Ended June 30
    (US Dollars in thousands)

                                     2009        2008
    Gross Premiums Written     $1,501,190  $1,786,231
    Net Premiums Written        1,078,278   1,359,467
    Net Premiums Earned         1,281,749   1,508,787
    Underwriting Income            89,439     126,356
    Loss Ratio                       60.8%       62.2%
    Expense Ratio                    32.2%       29.4%
    Combined Ratio                   93.0%       91.6%



    --  P&C Gross and Net Premiums Written declined from the prior year
        quarter primarily due to planned reductions in long-term agreements,
        strengthening of the US dollar compared to the second quarter of 2008
        and planned reductions in our financial lines business units.  Also
        impacting the decline is continued competitive pricing in certain
lines.
    --  P&C Net Premiums Earned included $881.5 million from the Insurance
        segment and $400.3 million from the Reinsurance segment.
    --  The loss ratio for the quarter was 60.8% compared to 62.2% for the
        second quarter of 2008.  Included in the current quarter loss ratio
was
        prior period favorable development of $89.6 million compared to $182.5
        million in the second quarter of 2008.
    --  The second quarter 2009 loss ratio was not impacted by any new natural
        peril catastrophe losses compared to the second quarter of 2008, which
        had catastrophe losses, net of reinstatement premiums, of $98.1
million.
    --  The expense ratio during the quarter includes charges of approximately
        $9.1 million related to the Company's previously announced cost
        reduction efforts, of which $4.1 million and $3.0 million relate to
the
        Insurance and Reinsurance segments, respectively.

    --  The P&C combined ratio for the quarter was 93.0% compared to 91.6%
        for the quarter ended June 30, 2008.  Excluding the charges for the
cost
        reduction initiatives, the current quarter combined ratio would have
        been 92.4%.


Capital Position
Book value per ordinary share was $18.89 as compared to $15.02 at March 31,
2009.

Net unrealized losses on investments, net of tax, were $3.2 billion at June
30, 2009 compared with net unrealized losses, net of tax of $4.0 billion at
March 31, 2009. The decrease in net unrealized losses for the quarter in the
Company's P&C operations was substantially due to the tightening of credit
spreads on both corporate and structured credit assets, offset by the impact
of increases in US Government interest rates.  The decrease in net unrealized
losses in the Company's Life operations was a result of tightening credit
spreads in Sterling and Euro corporate credit spreads, and particularly hybrid
corporate financials, offset by the effect of increases in interest rates. 
The reported decrease of $0.8 billion in unrealized losses during the quarter
comprises an increase of $1.0 billion in the value of the investment portfolio
offset in part by the transitional adjustment of $229.7 million referred to
above.

Further details of the results for the quarter and of the Company's fixed
income investment portfolio may be found in the Company's Financial Supplement
and Fixed Income Portfolio Data Supplement, respectively.  These documents are
both dated July 28, 2009 and are available from the Investor Relations section
of the XL Capital website.

The Company will host a conference call to discuss its Second Quarter results
on Wednesday, July 29, 2009 at 10.00 a.m. Eastern time. The conference call
can be accessed through a listen-only dial-in number or through a live
webcast. To listen to the conference call, please dial (877) 422-4657 or (706)
679-0474, Conference ID# 1916647. The webcast will be available at
www.xlcapital.com and will be archived on XL's website from approximately 1:00
p.m. Eastern Time on July 29, 2009, through midnight Eastern Time on August
29, 2009. A telephone replay of the conference call will also be available
beginning at 2:00 p.m. Eastern Time on July 29, 2009, until midnight Eastern
Time on August 20, 2009, by dialing (800) 642-1687 or (706) 645-9291,
Conference ID# 1916647.

This press release contains forward-looking statements. Statements that are
not historical facts, including statements about XL's beliefs, plans or
expectations, are forward-looking statements. These statements are based on
current plans, estimates, and expectations, all of which involve risk and
uncertainty. Actual results may differ materially from those included in such
forward-looking statements and therefore you should not place undue reliance
on them. A non-exclusive list of the important factors that could cause actual
results to differ materially from those in such forward-looking statements
includes (a) changes in ratings, rating agency policies or practices; (b)
greater frequency or severity of claims and loss activity than XL's
underwriting, reserving or investment practices anticipate based on historical
experience or industry data; (c) trends in rates for property and casualty
insurance and reinsurance; (d) other changes in general economic conditions,
including the effects of inflation and changes in interest rates, credit
spreads, foreign currency exchange rates and other factors; (e) developments,
including uncertainties related to the depth and duration of the current
recession, and future volatility in the world's credit, financial and capital
markets that adversely affect the performance and valuation of XL's
investments or access to such markets; (f) the potential for changes to
methodologies, estimations and assumptions that underlie the valuation of the
Company's financial instruments that could result in changes to investment
valuations; (g) changes to the Company's assumptions as to whether it has the
ability and intent to hold available-for-sale securities to recovery; (h) the
potential effects of domestic and foreign regulatory developments, including
those which could impact the financial markets or increase XL's business costs
and required capital levels; (i) the ability of XL's subsidiaries to pay
dividends to the Company; (j) changes in the size of XL's claims relating to
natural catastrophe losses due to the preliminary nature of some reports and
estimates of loss and damage to date; (k) the potential that the agreement
with National Indemnity Company with respect to "Side A" directors and
officers liability policies may not produce the anticipated benefits; and (l)
the other factors set forth in XL's reports on Form 10-K, Form 10-Q, and other
documents on file with the Securities and Exchange Commission, as well as
management's response to any of the aforementioned factors. XL undertakes no
obligation to update or revise publicly any forward-looking statement, whether
as a result of new information, future developments or otherwise..


(1)  Defined as net income (loss) excluding net realized gains and losses on
investments, goodwill impairment charges, net realized and unrealized gains
and losses on credit, structured financial and investment derivatives, net of
tax,  for the Company and its share of these items for the Company's insurance
company affiliates for the periods presented and charges in respect of
guarantees relating to subsidiaries of Syncora Holdings Ltd. ("Syncora"), as
well as the gain recognized on the repurchase of the Company's Series C
preference ordinary shares.  "Operating income" is a non-GAAP measure.  See
the schedule entitled "Reconciliation" at the end of this release for a
reconciliation of "operating income" to net income (loss) available to
ordinary shareholders.



                                 XL CAPITAL LTD
                       SUMMARY CONSOLIDATED FINANCIAL DATA
                           (U.S. dollars in thousands)

                                   Three Months Ended     Six Months Ended
                                        June 30                June 30
                                      (Unaudited)            (Unaudited)
    Income Statement Data:
                                   2009        2008        2009        2008
                                   ----        ----        ----        ----
    Revenues:
    Gross premiums written  :
            - P&C operations $1,501,190  $1,786,231  $3,379,418  $4,487,125
           - Life operations    150,711     161,251     285,823     396,209

    Net premiums written :
            - P&C operations  1,078,278   1,359,467   2,583,589   3,496,020
           - Life operations    140,674     150,933     262,259     375,146

    Net premiums earned :
            - P&C operations  1,281,749   1,508,787   2,603,436   3,061,567
           - Life operations    147,951     172,935     277,785     332,517

    Net investment income       328,348     440,352     676,314     939,581
    Net realized (losses)
     gains on investments       (80,430)      2,040    (332,367)   (100,211)
    Net realized and
     unrealized (losses)
     gains on derivative
     instruments                    969       8,124        (438)     52,806
    Net income (loss) from
     investment affiliates       37,086     (20,435)     10,193      (8,636)
    Fee and other income          9,796      12,796      21,954      21,087
                                  -----      ------      ------      ------
              Total revenues $1,725,469  $2,124,599  $3,256,877  $4,298,711
                             ----------  ----------  ----------  ----------
    Expenses:
    Net losses and loss
     expenses incurred         $779,628    $938,585  $1,569,911  $1,939,478
    Claims and policy
     benefits                   174,588     209,725     332,547     406,024
    Acquisition costs           223,272     246,237     441,491     512,534
    Operating expenses          264,219     298,298     532,606     562,122
    Exchange (gains) losses     145,221       7,936     120,597      75,681
    Interest expense             54,198      65,441     115,539     189,553
    Amortization of
     intangible assets              464         420         929         840
                                    ---         ---         ---         ---
              Total expenses $1,641,590  $1,766,642  $3,113,620  $3,686,232
                             ----------  ----------  ----------  ----------

    Net income before
     non-controlling interest,
     income tax and net income
     from operating affiliates  $83,879    $357,957    $143,257    $612,479

    Non-controlling interest
     in net income of
     subsidiary                     (40)          -         (40)          -
    Income tax                   16,045      51,205      61,998      81,907
    Net (income) loss from
     operating affiliates       (17,667)     68,901      (7,339)     48,348
                                -------      ------      ------      ------

    Net income attributable
     to XL Capital Ltd          $85,541    $237,851     $88,638    $482,224
    Preference share
     dividends attributable
     to XL Capital Ltd           (5,592)          -     (42,126)    (32,500)
    Gain on repurchase of
     Series C preference
     ordinary shares                  -           -     211,816           -
                                -------     -------     -------     -------
    Net income available to
     ordinary shareholders      $79,949    $237,851    $258,328    $449,724
                                -------    --------    --------    --------



                      SUMMARY CONSOLIDATED FINANCIAL DATA
             (U.S. dollars in thousands, except per share amounts)


    Balance Sheet Data:                          As at            As at
                                             June 30, 2009   December 31, 2008
                                              (Unaudited)       (Note 1)
                                              -----------       --------



    Total investments available for sale     $27,738,956       $27,464,510

    Cash and cash equivalents                  3,989,372         4,353,826

    Investments in affiliates                  1,222,317         1,552,789

    Unpaid losses and loss expenses
     recoverable                               3,909,110         3,997,722

    Total assets                              45,412,217        45,622,278


    Unpaid losses and loss expenses           21,452,998        21,650,315

    Deposit liabilities                        2,436,809         2,710,987

    Future policy benefit reserves             5,862,406         5,452,865

    Unearned premiums                          4,266,872         4,217,931

    Notes payable and debt                     2,445,230         3,189,734

    Redeemable series C preference
     ordinary shares                             182,673           500,000

    Total shareholders' equity                 7,473,219         6,116,831

    Diluted book value per ordinary share         $18.89            $15.46

    Basic book value per ordinary share           $18.91            $15.46



    Note 1: Certain items have been reclassified to conform with the
     current period presentation.



                              XL CAPITAL LTD
                              RECONCILIATION

    The following is a reconciliation of the Company's (i) net income (loss)
    available to ordinary shareholders to operating income (loss) (Note 1)
    and (ii) annualized return on ordinary shareholders' equity (based on
    operating income (loss)) to average ordinary shareholders' equity for
    the three months ended June 30, 2009 and 2008.

                  (U.S. dollars in thousands except per share amounts)

                                                         Three Months Ended
                                                               June 30
                                                             (Unaudited)
                                                          2009         2008
                                                          ----         ----

    Net income available to ordinary shareholders      $79,949     $237,851

    Net realized losses (gains) on investments,
     net of tax                                         82,859       (2,590)

    Net realized and unrealized  losses (gains)
     on investment derivatives, net of tax                (130)      (5,695)

    Net realized and unrealized losses (gains) on
     credit and structured financial derivatives,
     net of tax                                            102            1

    Net realized and unrealized losses (gains) on
     investments and derivatives of the Company's
     insurance company affiliates                         (132)      (1,416)

    Gain on repurchase of Series C preference
     ordinary shares                                         -            -

    Mark-to-market charge for Syncora facultative
     agreements                                              -      (17,946)

    Charge in respect of guarantees issued to
     subsidiaries of Syncora                                 -       56,000

                                                      --------     --------
    Operating income (Notes 1 and 2)                  $162,648     $266,205
                                                      ========     ========

    Per ordinary share results: (Note 2)
    Net income (loss) attributable to ordinary
     shareholders                                        $0.23        $1.33

    Operating Income (Note 1)                            $0.47        $1.49

    Weighted average ordinary shares outstanding:

    Basic                                          342,153,533  179,054,435
    Diluted                                        342,467,928  179,054,495

    Return on Ordinary Shareholders' Equity:
    Average ordinary shareholders' equity           $5,805,260   $8,012,272

    Operating income (Note 1)                         $162,648     $266,205

    Annualized Operating income (Note 1)              $650,592   $1,064,820

    Annualized Return on Ordinary Shareholders'
     Equity - Operating income (Note 1)                   11.2%        13.3%
                                                          ====         ====


    Note 1: Operating income is defined as net income (loss) available to
     ordinary shareholders excluding net realized gains and losses on
     investments, goodwill impairment charges, net realized and unrealized
     gains and losses on credit, structured financial and investment
     derivatives, net of tax for the Company and its share of these items
     for the Company's insurance company  affiliates for the periods
     presented and charges in respect of guarantees relating to subsidiaries
     of Syncora, as well as the gain recognized on the repurchase of the
     Company's Series C preference ordinary shares.
    Note 2:  Diluted weighted average number of ordinary shares outstanding
     are used to calculate per share data except where they are anti-
     dilutive to earnings per share or where there is a net loss.



                              XL CAPITAL LTD
                              RECONCILIATION

    The following is a reconciliation of the Company's (i) net income (loss)
    available to ordinary shareholders to operating income (loss) (Note 1)
    and (ii) annualized return on ordinary shareholders' equity (based on
    operating income (loss)) to average ordinary shareholders' equity for
    the six months ended June 30, 2009 and 2008.

            (U.S. dollars in thousands except per share amounts)

                                                          Six Months Ended
                                                               June 30
                                                             (Unaudited)
                                                          2009         2008
                                                          ----         ----

    Net income available to ordinary shareholders     $258,328     $449,724

    Net realized losses (gains) on investments,
     net of tax                                        325,723       95,787

    Net realized and unrealized  losses (gains)
     on investment derivatives, net of tax               1,350      (39,815)

    Net realized and unrealized losses (gains) on
     credit and structured financial derivatives,
     net of tax                                          1,514           58

    Net realized and unrealized losses (gains) on
     investments and derivatives of the Company's
     insurance company affiliates                           (9)        (736)

    Gain on repurchase of Series C preference
     ordinary shares                                  (211,816)           -

    Mark-to-market charge for Syncora facultative
     agreements                                              -      (17,946)

    Charge in respect of guarantees issued to
     subsidiaries of Syncora                                 -       56,000

                                                      --------     --------
    Operating income (Note 1, 2, and 3)               $375,090     $543,072
                                                      ========     ========

    Per ordinary share results: (Note 2)
    Net income (loss) attributable to ordinary
     shareholders                                        $0.76        $2.52

    Operating Income (Note 1)                            $1.11        $3.04

    Weighted average ordinary shares outstanding:

    Basic                                          339,155,217  178,701,331
    Diluted                                        339,262,340  178,701,480

    Return on Ordinary Shareholders' Equity:
    Average ordinary shareholders' equity           $5,793,039   $8,358,668

    Operating income (Note 1)                         $375,090     $543,072

    Annualized Operating income (Note 1)              $750,180   $1,086,144

    Annualized Return on Ordinary Shareholders'
     Equity - Operating income (Note 1)                   12.9%        13.0%
                                                          ====         ====


    Note 1: Operating income is defined as net income (loss) available to
     ordinary shareholders excluding net realized gains and losses on
     investments, goodwill impairment charges, net realized and unrealized
     gains and losses on credit, structured financial and investment
     derivatives, net of tax for the Company and its share of these items
     for the Company's insurance company  affiliates for the periods
     presented and charges in respect of guarantees relating to subsidiaries
     of Syncora, as well as the gain recognized on the repurchase of the
     Company's Series C preference ordinary shares.
    Note 2:  Diluted weighted average number of ordinary shares outstanding
     are used to calculate per share data except where they are anti-
     dilutive to earnings per share or where there is a net loss.
    Note 3: Diluted weighted average ordinary shares outstanding for year
     to date ended June 30, 2009 include the impact of the Company's 2008
     Equity Security units ("ESU") on an "if converted" basis for the period
     January 1, 2009 to February 17, 2009 when they were converted into
     class A ordinary shares. Net income and Operating income per share for
     year to date ended June 30, 2009 have been adjusted to exclude $4,829
     of ESU interest from January 1, 2009 to February 17, 2009.




Comment on Regulation G 
This press release contains the presentation of (i) operating income (loss),
which is defined as net income (loss) excluding net realized gains and losses
on investments, goodwill impairment charges, net realized and unrealized gains
and losses on credit, structured financial and investment derivatives, net of
tax, for the Company and its share of these items for the Company's insurance
company affiliates for the periods presented and charges in respect of
guarantees relating to subsidiaries of Syncora, as well as the gain recognized
on the repurchase of the Company's Series C preference ordinary shares and
(ii) annualized return on ordinary shareholders' equity (based on operating
income (loss)) to average ordinary shareholders' equity.  These items are
"non-GAAP financial measures" as defined in Regulation G.  The reconciliation
of such measures to the most directly comparable GAAP financial measures in
accordance with Regulation G is included above.

XL presents its operations in the way it believes will be most meaningful and
useful to investors, analysts, rating agencies and others who use XL's
financial information in evaluating XL's performance.  This presentation
includes the use of "operating income (loss)" and annualized return on
ordinary shareholders' equity based on operating income (loss). Investment
derivatives include all derivatives entered into by XL other than weather and
energy and credit derivatives (discussed further below).

Although the investment of premiums to generate income (or loss) and realized
capital gains (or losses) is an integral part of XL's operations and the
Company's insurance company operating affiliates, the determination to realize
capital gains (or losses) is independent of the underwriting process.  In
addition, under applicable GAAP accounting requirements, losses can be created
as the result of other than temporary declines in value and from goodwill
impairment charges without actual realization.  In this regard, certain users
of XL's financial information, including certain rating agencies, evaluate
earnings before tax and capital gains to understand the profitability of the
recurring sources of income without the effects of these two variables.
Furthermore, these users believe that, for many companies, the timing of the
realization of capital gains and the recognition of goodwill impairment
charges are largely opportunistic and are a function of economic and interest
rate conditions.

In addition, with respect to credit derivatives, because XL and its insurance
company operating affiliates generally hold financial guaranty contracts
written in credit default derivative form to maturity, the net effects of the
changes in fair value of these credit derivatives are excluded (similar with
other companies' treatment of such contracts) as the changes in fair value
each quarter are not indicative of underlying business performance. Unlike
these credit derivatives, XL's weather and energy derivatives are actively
traded (i.e., they are not held to maturity) and are, therefore, not excluded
from net income as any gains or losses from this business are considered by
management when evaluating and managing the underlying business.

Charges in respect of guarantees issued by XL Insurance (Bermuda) Ltd, in
respect of subsidiaries of Syncora, as well as the gain recognized on the
repurchase of the Company's Series C preference ordinary shares, are excluded
as these transactions were capital in nature and outside the scope of the
Company's underlying business.

In summary, XL evaluates the performance of and manages its business to
produce an underwriting profit. In addition to presenting net income (loss),
XL believes that showing operating income (loss) enables investors and other
users of XL's financial information to analyze XL's performance in a manner
similar to how management of XL analyzes performance. In this regard, XL
believes that providing only a GAAP presentation of net income (loss) makes it
much more difficult for users of XL's financial information to evaluate XL's
underlying business. Also, as stated above, XL believes that the equity
analysts and certain rating agencies that follow XL (and the insurance
industry as a whole) exclude these items from their analyses for the same
reasons and they request that XL provide this non-GAAP financial information
on a regular basis.

Return on average ordinary shareholder's equity ("ROE") excluding net realized
gains and losses on investments, goodwill impairment charges and net realized
and unrealized gains and losses on credit and investment derivative
instruments, net of tax, for the Company and its share of these items for
Syncora and the Company's other insurance company operating affiliates (the
"Exclusions"), is a widely used measure of any company's profitability.
Annualized return on average ordinary shareholders' equity (minus the
Exclusions) is calculated by dividing annualized net income minus the
Exclusions for any period by the average of the opening and closing ordinary
shareholders' equity. The Company establishes target ROEs (minus the
Exclusions) for its total operations, segments and lines of business. If the
Company's ROE (minus the Exclusions) return targets are not met with respect
to any line of business over time, the Company seeks to re-evaluate these
lines. In addition, the Company's compensation of its senior officers is
dependant upon, among other things, the achievement of the Company's
performance goals to enhance shareholder value which include ROE (minus the
Exclusions) and its P&C combined ratio.

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